Financial Management Flashcards
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What is the primary focus of working capital management?
Managing inventory & receivables (current assets & liabilities)
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How is Net Working Capital calculated?
NWC : Current Assets - Current Liabilities
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What are the characteristics of effective Working Capital Management?
Shorten the cash conversion cycle
Don’t negatively impact operations
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What is the Inventory Conversion Period?
Average time needed to convert materials into finished goods and sell them
Average Inventory : (BI + E) / 2
Inventory Conversion Period : Average Inventory / Sales Per Day
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What is the Receivables Collection Period?
Average time needed to collect A/R
RCP : Average Receivables / Credit Sales Per Day
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What is the Payables Deferral Period?
Average time between materials and labor purchase and their A/P payment
Average Payables : (BP + EP) / 2
Payables Deferral Period : Average Payables / (COGS/365)
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What is the Cash Conversion Cycle?
Amount of time it takes to receive a cash inflow (Customers) after making a cash outflow (Vendors)
Inventory Conversion Period
+ Receivables Collection Period
- Payables Deferral Period
: Cash Conversion Cycle
(Inventory Really (-Pays) Cash)
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What traits should Cash and Short-Term Investments have?
Liquid
Safe
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For what are Letters of Credit used?
Used for importing goods.
Issued by importer’s bank.
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What is the advantage of using Trade Credit?
No interest cost if paid timely.
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What is a Lockbox System? What are the advantages?
Customer Payments are sent to a bank-managed PO box.
Employees don’t have access to cash.
Deposits are more timely.
Interest income from deposits should pay for the Lockbox fees (if they don’t- lockbox is not beneficial)
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What is float?
Time it takes to mail a payment and have it clear your bank account
Maximize float on cash payments
Minimize float on cash receipts
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What are Zero Balance Accounts?
Regional bank sends enough cash to cover daily checks
Advantages:
Checks take longer to clear -more float
Low amounts of cash tied up for compensating (minimum) balances
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What is the difference between Treasury Bills- Notes and Bonds?
Treasury Bills: Short term (less than one year) Think: $1 Bill
Treasury Notes: Medium term (less than 10 years- more than 1)
Treasury Bonds: Long term (greater than 10 years) Think: government is in long-term bondage to you; they owe you money
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What is commercial paper?
Similar to T-Bill- but issued by corporations instead of Government
Greater than 9 Months Maturity
Unsecured
Issued by large firms
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What are the advantages and disadvantages of Commercial Paper?
Advantages: Financing at less than Prime. No compensating balances required.
Disadvantages: Unpredictability of markets. Credit crisis emerges and large insurance/investment companies aren’t lending.
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What is Economic Order Quantity?
The order quantity that minimizes inventory costs.
EOQ : Square Root of (2DO/C)
D : Unit Demand (Annual)
O : Order Cost
C : Cost of Inventory
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What is Carrying Cost?
The cost of keeping inventory.
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What is Order Cost?
Cost of executing an order and starting product production.
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What is inventory reorder point?
How low inventory should get before it should be re-ordered.
IOP : Average Daily Demand x Average Lead Time
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What is a Just In Time (JIT) system?
Orders inventory so that you get it just in time for when it’s needed
JIT is valuable when Order Cost is low and Cost of Carrying Inventory is high
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What is Factoring of receivables?
Receivables are sold to a financing company where they pay less than the value of the receivables due to a discount related to risk of non-collection
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What is a Trade Discount?
Buyer saves if paid early
Example: 1/10 Net 30
1% Discount if paid within 10 days
If not- bill is still due in 30 days
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What is the cost of forgoing a discount?
(Discount % x 365) / ((100% - Discount) x (Pay Period - Discount Period))
